If you walked up to the cashier at your local grocery store with a gallon of milk in hand and said, “It says $2.49 on this sticker, but I’ll give you a buck-fifty,” you’d be going home thirsty. If you walked into McDonald’s and said, “I don’t see a lot of people eating Big Macs today. I’ll take that value meal off your hands for just three bucks!” you’d leave hungry. But walk into a car dealership, and you are expected to bargain with the salesman. Pay sticker, and you’re giving the dealer hundreds or—in most cases—thousands of dollars in additional profit.
Considering that the car dealership is a business and performing a necessary service—getting the car from the factory to you—some profit is definitely deserved. How much is fair profit depends on a number of factors, including the specific car and demand for it, the options, your location, and how long the car has been on the lot. So we can’t tell you exactly what to pay. But we can tell you what to do to optimize your chances of paying what you want.
Shop for Your Own Financing
For most of us, financing is the only way we can afford a new car. Most dealerships can provide you financing, but be sure to check at your bank or credit union before you go to the dealer's, as those other organizations will often offer you a better interest rate. At the very least, shopping around will give you an idea of what rates you qualify for, so you can police the dealership’s offer later. For more on what to do prior to visiting the dealership, read “What to Know Before You Go.”
Never Be Afraid to Walk Away
This is the most important thing to keep in mind when shopping for a car. It might be uncomfortable to walk away, but remember that it is your money on the line, and it really doesn’t matter if anyone at the dealership thinks you are irrational or whiny. There’s certainly no reason to be unpleasant, but if you feel you are being treated unfairly or are the victim of classic dealership tricks, walk away. There’s a good chance someone will stop you, and negotiations will begin again in earnest.
Know the Invoice Price
Invoice price is what the dealer pays the manufacturer for your car. Anything over invoice is dealer profit. Even if you pay exactly invoice, the dealer makes some money in the form of holdback, a percentage of the car’s MSRP that most manufacturers pay back to their dealers quarterly. You can look up invoice prices and cash rebates using CARandDRIVER.com’s Buyer’s Guide. Once you know the invoice price and any rebates, start negotiating there and work upward.
Watch All Areas of the Foursquare
Most car salesmen use a worksheet called a foursquare to map out the major factors of your deal: purchase price, down payment, monthly payment, and trade-in value. Some will try to juggle the elements of this sheet, forfeiting a little to you on down payment but inflating your monthly payments while you bask in the glow of victory, or giving you a good deal on your trade-in but negating that with an inflated new-car price. The foursquare leaves out two critical numbers—interest rate and loan term—that will dictate your monthly payments and total amount paid. Keep track of each quadrant and these two additional figures, and try to keep each at a fair level.
Never Negotiate in Terms of Monthly Payments
For many buyers, the most important aspect of a major purchase is how much it will take out of our earnings on a monthly basis. When negotiating the purchase price, though, don’t fall into the trap of negotiating based on monthly payments, as many customers are placated with a low monthly payment but fail to notice the swelling interest rate or stretched loan term. Monthly payment is just the result of your down payment, loan term, and interest rate. If your purchase price and trade-in value are fair and you get a competitive interest rate, your payment will be as low as possible.
Don’t Let Your Trade-In Be Used Against You
Don’t discuss trade-in until your new-car price is settled. Tell the salesperson you will discuss trading in when you are happy with your purchase price. Once you’ve settled that, if you really feel like playing hardball, tell the salesman you’re not buying a new car unless you get a good deal on the trade-in, too.
Just as it is important to do your research on your new-car purchase before going to the dealership, a smart shopper does the research on the trade-in as well. Know what a fair price is for your used car—you can look this up at the CARandDRIVER.com Used Car Pricing Guide, and don’t let the dealer steal it from you. You can often obtain a better price selling the car yourself, but selling it to the dealer is convenient. Know what that convenience is worth to you, and try to reach a fair compromise.
Just When You Thought It Was Over
You’ve settled on a price with the salesperson, but your deal isn’t closed yet. You’ll be ushered into the finance and insurance manager’s office, where you’ll have to keep your guard up against a possible onslaught of fees and extras. Some of the fees are unavoidable, but many can be bargained down or avoided altogether, and virtually all extras the finance manager offers are unnecessary and overpriced.
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